Lack of selling suggests more upside ahead

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

The uncertainty in shares that had set in over the past week, characterized by soft price action and dimming volume, took a step toward resolution Thursday.

While the market had every reason to pull back or just idle until next week's bursting data docket (Wed: FOMC, Thurs: ISM, Fri: employment), a large number of the cycle's speculative growth glamours caught a bid during the actively traded session.

The day's action constituted the unexpected, and in speculation, it is the unexpected that should always be accorded the most attention.

Nasdaq volume was the heaviest since the fourth day of this 22-session advance. It was the second-most-active up day since February.

Within the list, small-capitalization titles perform best, their relative-strength line moving into new-high ground Thursday. The below chart of micro-cap issues shows a robust degree of upward slope to the relative strength line. It indicates that market participants are loathe to begin the rotation from speculative to defensive.

This rotation normally begins to occur in the latter portion of a cyclical bull market. That it has yet to transpire is one of the hints that this market does not appear to be teetering near a primary top, as noted previously.

The financials are also prominent outperformers. health care, aided by a smart-acting biotech segment, is the steadiest broad sector among defensive, or risk-off, areas.

Participants exit bond funds at a brisk clip. Yet instead of the money moving into equities, as it has done traditionally in a bull market, it locates the safety of cash. This corroborates anecdotal evidence that the individual investor is not "down" with this market.

Tradition also dictates that the longer a bull runs, the more participants are likely to exit the sidelines and jump in the pool. Might it be different this time? "It's different this time" are the four most expensive words on Wall Street, purportedly.

Either way, relying on anecdotal evidence to move into or out of the market is not the most effective means of playing such a competitive game as this one.

Among the names, Cabot Oil & Gas COG, +0.26%
was noted here July 9 ("COG offers a potential entrance above the high of its base at 74.23, with a 6%-7% stop in case proven incorrect."). Cabot is considered one of the top three fracking plays in the exploration segment.

Most analysts eye earnings growth for COG of 127% and 70% in 2013/'14. Thursday the stock broke out of its eight-week base by gapping at the open and closing up 7% on volume 143% above normal. The catalyst for the move was the release of its earnings report, and news it would double its dividend and split its shares two-for-one.

COG is 3.7% above the top of its base and, therefore, is not considered materially extended. It is potentially buyable around Thursday's closing level of 76.56, using a reasonable stop-loss to protect precious capital in the event price moves the other way.

A quick word on sell-stops for long positions: Use them. As there are 101 ways to skin a cat, there are 101 ways to invest/speculate/trade. But there is only one way to protect precious capital. And that is to cut losses short when wrong.

A few operate on the assumption that it is better to sit with paper losses and wait until these positions return to breakeven before selling. Do not be one of them.

Compared with other, more genuine leaders, Chipotle Mexican Grill CMG, -0.50%
has not been attractive here for some time. The Street looks for earnings growth to be 21% in 2013 and 22% in '14.

The notable thing about this company is that the stability of earnings is high for a company growing at these rates. This combination of solid earnings growth rate, high earnings stability, and deep liquidity ($172 million in average dollar volume) makes CMG attractive to institutional players.

Technically, price cleared a congestion area a week ago, gapping at the open to close up 9% on volume 481% above average. This is the type of conviction that is always preferred on a breakout day. Since then, price has eased on reduced volume. Thursday, price put in an outside day as volume increased to 25% above average.

CMG can potentially be taken by an aggressive speculator around Thursday's close of 404.25. The distance between 404.25 and the top of its prior congestion is 3.5%. A protective stop of 5%-6% below entrance would be reasonable.

Elsewhere, Sohu SOHU, -0.39%
may be interesting on a volume-backed breakout following its upcoming earnings release, with most on Wall Street predicting 37% earnings growth in 2014. Shares of the Chinese Internet portal work on a nine-week base. The depth of the pattern is 15%, which is reasonable.

Shares have essentially gone straight up since the June 24 low. While the market has made little progress over the past week, there has been very little give-back, or profit-taking, which one would expect. This, in combination with the action of the leading stocks, augurs for upward revaluation.

Kevin Marder

Earnings estimate data provided by Thomson Reuters.

The views contained herein represent those of Marder Investment Advisors Corp. ("MIAC"). At the time of this writing, of the stocks mentioned in this report, Kevin Marder, MIAC, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. This information, which may have been previously disseminated, is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance of any security or strategy is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to MIAC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position.

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